Pre-legislative scrutiny of the Building Safety Bill Contents

---

1Leaseholders and the building safety charge

Background

21.Clauses 88 and 89 of the draft Bill amend the Landlord and Tenant Act 1985 to establish a building safety charge payable by tenants with long leases (over 21 years) to facilitate the recovery of costs incurred by the landlord in the monitoring and managing of building safety. Such costs might arise, among other things, from the carrying out of building safety works, the production of the safety case report, the appointment of the building safety manager, resident engagement and the day-to-day monitoring of building safety. According to the explanatory notes, the charge is to be a separate charge from the service charge “so that costs incurred on building safety measures will be readily identified and accounted for.”26

Remediation of historical safety defects

Leaseholder liability

22.As drafted, clauses 88 and 89 permit leaseholders to be charged for the cost of remediating historical safety deficiencies for which they were not responsible, which may have pre-dated their occupation, and regardless of whether at the time of any earlier work the building complied with prevailing safety requirements. Nothing aroused nearly so much anger or upset in the evidence to our inquiry. One submission, from the Franklin House Leaseholders Syndicate, described it as “shocking”,27 whilst Swish Residents Association thought the Bill failed to address

the injustice of leaseholders having to foot the bill for the incompetence, negligence and/or unlawful actions of those who have a legal duty of care towards those who buy and inhabit the property.28

23.The Local Government Association, in describing these provision as the Bill’s “greatest shortcoming”, thought that leaseholders “should not be left to pick up the pieces of the broken building safety system”.29 Giles Peaker, a prominent housing lawyer, described the provisions as “inherently unfair”,30 and another submission, from leaseholder Mr Bullock, thought the provisions based on the “pre-conception that a leaseholder should be made financially liable for all the failings and shortcoming of every regulatory body and everyone else involved.”31 Even the HSE, otherwise very supportive of the Bill, did not think that leaseholders should “have to worry about the cost of fixing historic safety defects in their buildings that they did not cause.”32 Quite simply, no one besides the Government thinks the leaseholder should pay.

24.As noted in the evidence, these provisions contradict repeated ministerial assurances, given since the Grenfell Tower fire, that leaseholders would and should not have to pay for remediation works. There are too many to quote them all, but on 27 February 2019 the then Prime Minister, Theresa May, told the House of Commons:

As I have said previously, we fully expect building owners in the private sector to take action, make sure appropriate safety measures are in place, and not pass costs on to leaseholders.33

25.The present Government appeared to recommit to this principle when, on 20 July 2020, the Secretary of State, Robert Jenrick, in his written statement announcing publication of the draft Bill, wrote:

The Government are clear that it is unacceptable for leaseholders to have to worry about the cost of fixing historic safety defects in their buildings that they did not cause.34

26.We note with concern, however, that both the Secretary of State, later in his statement, and the Housing Minister, Christopher Pincher, who reiterated this commitment in a written ministerial answer on 16 October, went on to say:

We must remove barriers to fixing historic defects and identify financing solutions that protect leaseholders from unaffordable costs.35

27.The second sentence appears to contradict the first, as we think it unlikely that leaseholders would not “worry” about the prospect of being protected only from “unaffordable costs”. The explanatory notes reiterate this change in policy, stating it is “the policy intention that as far as possible leaseholders should not have to face unaffordable costs”.36 The Minister failed in oral evidence to satisfactorily define “affordable”, suggesting only that it implied any costs that did not bankrupt a person.37 Leaving aside the question of whether “affordable” could ever signify anything meaningful in this context, we are disappointed that the Government could countenance the idea of a single leaseholder being bankrupted by these provisions, as implied by the words “as far as possible”.

28.This changed policy intention was flagged up repeatedly in evidence. Martin Boyd, from the Leasehold Knowledge Partnership, told us in oral evidence:

We have had nearly 1,200 days of Secretaries of State saying that leaseholders should not be paying for defective buildings. It is not their fault; they did not build them; they had no means to know when they were buying their homes that they were going to be deemed defective later on. This Bill then flips that round and says, ‘We will specifically make you, as the leaseholder, liable for all historical defects’.38

29.We were disappointed by the Minister’s response when we asked him about this policy shift; he observed only that it was before his time and that he personally had never held that view,39 which is surprising given his evidence to our cladding inquiry earlier this year:

We believe that those costs should not fall on leaseholders. I feel very bad about that. I really stand four-square behind the leaseholders. This is not something that should be burdening them. It is the responsibility of the building owner to make the building safe.40

30.In our report following that inquiry, Cladding: progress of remediation, we concluded:

Funding of remediation should reflect where blame lies. It is clear that there have been widespread failures. What is also clear, however, is that residents are in no way to blame and it is our view that they should bear none of the cost of remediation.41

31.We continue to believe that residents should not bear any of the costs of remediating historical building safety defects and are deeply concerned by the Government’s failure to protect them from these costs. We are especially disturbed by its commitment to protecting them only from “unaffordable costs”. It would be unacceptable and an abdication of responsibility to make them contribute a single penny towards the cost of remediating defects for which they were not responsible.

32.The Government must recommit to the principle that leaseholders should not pay anything towards the cost of remediating historical building safety defects, and, in order to provide leaseholders with the peace of mind they deserve, amend the Bill to explicitly exclude historical costs from the building safety charge.

Responsibility for funding remediation

33.As noted, we concluded in our cladding report that responsibility for funding remediation “should reflect where blame lies”,42 and that principle holds good for all remediation works, not just the removal of dangerous cladding. In our view, there are only two sources of viable funding: industry and government. In the same report, we concluded:

Given the urgency of these remediation works, it is necessary for the Government to provide the funding up front. However, it cannot be fair for the financial burden of remediating buildings to rest solely with taxpayers. Those who are responsible for this crisis should be made to contribute.43

34.The evidence was almost unanimous on this question of who should pay. Martin Boyd told us in oral evidence that “only two groups … are potentially liable for these defects, either the developers or the Government. We had either defective regulations or defective building.”44 The LGA wrote:

Government needs to fund a recovery programme in the housing sector and the developers who have profited from providing inadequate buildings should be required to pay their share of the costs.45

35.The Birmingham Leaseholder Action Group said “sufficient funds should be made available by Government to fix these buildings as soon as possible, with these costs being recouped by Government from those responsible.”46 Franklin House Leaseholders Syndicate thought “the Government should clarify its commitment to pay these costs”.47

36.Whilst the evidence placed varying emphasis on either government or industry funding, there was broad agreement that the only realistic and reasonable solution was a combination of the two. In this regard, we acknowledge evidence from Michael Wade, expert adviser to the Department, that the Government were working to identify “potential funding options”,48 besides leaseholders, for funding remediation, but we regret its failure to commit any more of taxpayers’ money beyond the £1.6 billion in the building safety fund, which we heard was “expected to fall short of what is required to pay for remediation of legacy buildings around the country”.49 We agree that, in the words of UK Finance, the Government “should provide sufficient funding to accelerate and scale-up the remediation of affected buildings”.50

37.We briefly note, too, that the Bill does not address the need to pursue developers for inadequate historic work. We understand there are legal obstacles to building owners (other than original owners, who might be able to rely on a contract) claiming against developers for “pure economic loss”, where homes are defective but no physical damage has yet been caused, more than six years after the building was completed.51 We note only that other jurisdictions have taken measures. For example, New South Wales in June enacted legislation placing a duty on builders to exercise care to avoid economic loss, with 10 years’ retrospective effect.52

38.It seems self-evident that responsibility for funding remediation works lies jointly with the industry and the Government. Whilst we welcome the assurances that the Government is looking at potential financing options for recovering costs, in the short term we see no alternative to the Government itself, and therefore the taxpayer, footing much of the bill. We can think of no other means by which the necessary works can be carried out quickly enough.

39.The Government must announce, before they publish the Bill, its proposals for funding all historical building safety remediation works. These proposals should impose no costs on leaseholders and explicitly acknowledge that in the short term the Government must foot the bill, until such time as mechanisms for cost recovery have been developed. We also urge the Government to explore the options for reform of the law preventing building owners with no contractual remedy claiming against developers for defective construction more than 6 years old which has not caused damage. The New South Wales legislation offers a possible model.

Building safety charge

40.One of the most controversial aspects of the building safety charge provisions is the requirement that leaseholders pay it within 28 days of demand.53 The National Leasehold Campaign described the 28 days as “ridiculously short” and “cruel and unnecessary”,54 whilst the Chartered Institution of Building Services Engineers called it “insufficient and quite unrealistic”. Councillor Christine Hulme, on behalf of leaseholders in Slough, wrote:

The biggest worry for many of these residents is the proposal that leaseholders must pay building owners within 28 days of the time the bill was issued. Many leaseholders find this timescale completely unreasonable.55

41.Another concern is the Government’s proposed power to impose consultation requirements in respect of “qualifying” building safety works. We presume (though there is no assurance) this power would be exercised similarly to that in relation to service charges.56 However, we were told that in practice where fire safety works are recoverable under existing service charges, tribunals will usually allow consultation to be dispensed with.57 This is unsurprising: the works are usually urgent and the tribunal acts on the basis that very urgent works are obvious cases for dispensation with consultation.58 If landlords can recover the cost of remedying existing fire safety defects through the building safety charge, it seems likely that the cost of remediation—at least where urgent—will pass to leaseholders without much, or any, consultation. This will be the case already where that cost is recoverable under the service charge provisions of existing leases, but—as a number of witnesses told us—service charge provisions in leases often provide that “improvements” are not chargeable to leaseholders.

42.The requirement to pay the building safety charge within 28 days of demand and the lack of effective consultation protection simply compound the unfairness, and potentially catastrophic consequences, of allowing leaseholders to be charged the cost of remedying historic defects. The 28-day deadline seems particularly unreasonable.

43.If the Government does not adopt our recommendation to protect leaseholders from all historic costs, we ask at the very least that it give them significantly longer than 28 days to pay the building safety charge and amend the provisions to make it clear that the consultation requirements should be dispensed with only in exceptional circumstances, even in the case of building safety works.

Separation of building safety charge from service charge

44.As noted, the stated intention behind having a separate charge is to “give leaseholders greater transparency around costs incurred in maintaining a safe building”.59 We are concerned, however, that the principal reason is rather to facilitate the charging of leaseholders for the remediation of historical defects. The Minister, Lord Greenhalgh, appeared to admit as much in oral evidence, when asked about the separation:

We need to understand that leases are written in different ways and service charges do not all operate in the same way. I have seen views of lawyers that indicate it may be very hard to put costs that relate to historical defects through the service charge in some cases.60

45.We acknowledge that some submissions, most notably that from the HSE,61 accepted the Government’s argument that a separate charge would facilitate transparency. Among others, Consensus Business Group, the professional freeholder, argued that “a number of costs which hitherto have been included within the service charge, which would fall more naturally into the BSC” and further that separating the charges “should also help to focus all stakeholders’ minds to the importance of building safety some costs”.62 We understand the case for a separate charge, and we believe that it has some merit, but, as we have already noted, we are concerned that the real reason is to facilitate the inclusion of costs for the remediation of historical defects.

46.Besides this, we heard strong opposition to a separate charge from those worried that it would increase bureaucracy and administration costs. Dr Nigel Glen, CEO of the Association of Residential Managing Agents, told us:

It does not make sense to me to have the building safety charge, apart from transparency, outside the service charge. I think that enters a whole new regime of costs that we do not need. They are not necessary. You have to have separate bank accounts, separate debt recovery, separate everything, so that is double the amount of administration.63

47.Wallace Partnership Group, the professional freeholder, was worried that disputes might arise over which charge different types of expenditure should fall within and wondered why an unnecessary extra layer of bureaucracy was being introduced. The Institute of Residential Property Management thought it would be “simpler, cheaper and easier” to stick with existing service charge provision. It argued that the cost of administering a separate trust client account and separate accounting regime would result in “bank charges being incurred by the managing agent, which will ultimately end up in additional costs being paid by the leaseholder.”64

48.Property management and leaseholders’ support groups predicted that cost and complexity of administration would be compounded by legal dispute and loss of protection for tenants. Although the IRPM explained that the Government’s approach had been to take “large chunks of existing service charge provisions and near-replicate them outside the protection of existing service charge legislation”, it felt that “important leaseholder protections” had been removed:

Leasehold and service charge law is governed by a handful of statutes and a great deal of case law, built up over the last 35 years. Creating ‘similar but different’ provisions will return to zero the case law process in the name of the BSC and we should expect the new rules to be similarly tested in Tribunals and Courts over the coming years.65

49.Dr Glen of ARMA suggested there would be “years” of legal disputes involving “loads of test cases with managing agents dragged into that and leaseholders paying for it.”66 The Leasehold Knowledge Partnership thought the draft Bill “removes many of the existing, albeit weak, protections under existing leasehold law”, and that leaseholders’ rights to challenge would be “after the event; at their own expense; with no chance of recovering their costs if the AP and RP overspend”. Others thought that existing tribunal decisions suggested challenges to the building safety charge would be hard to win.67

50.In particular, many witnesses suggested the draft Bill bypassed the protection provided by the requirement to consult in respect of works which will cost any leaseholder, through the service charge, more than £250.68 The provisions in relation to consultation over the building safety charge are near identical. The threshold above which there must be consultation is—as with service charges—to be set out in, or determined by, regulations.69 The regulations will be subject to the same level of parliamentary scrutiny in both cases.70 If the Government exercises its powers identically under both provisions, no protection appears to be lost.71

51.Integrating the new charge with service charges presents new difficulties. The Government implies in the draft Bill that not all long leases have service charge provisions72 and nobody has suggested otherwise. We recognise the difficulties which might be faced in ensuring that all leaseholders be required to contribute to ongoing safety costs, regardless of whether there is a service charge provision, and that the method the Government has adopted attempts to solve that conundrum. But we do not think the difficulties insuperable. There could be default provision (similar to the proposed sections 17G to 17X) for leases without service charges,73 and application to the tribunal as a last resort.

52.The transparency the Government relies upon as justifying the separate BSC74 could be achieved by “levelling up” the transparency of service charges. The requirements to provide leaseholders with service charge information, enacted in 2002 and amended in 2008, have never been brought into force.75 This Committee’s predecessor recommended in 2019 that:

The Government should require the use of a standardised form for the invoicing of service charges, which clearly identifies the individual parts that make up the overall charge.76

This improvement, if enacted carefully, would provide ample transparency for the building safety-related elements of a service charge.

53.We do not think it necessary to establish the building safety charge separate from the service charge. Aside from the unnecessary additional bureaucracy and administration costs, a separate charge means additional, separate, bills for leaseholders at intervals and within periods which may differ from those in their leases. The same benefits of transparency (the Government’s justification for a separate charge) can be achieved by implementing our previous recommendation on standardised forms for service charge invoices.

54.The Government should provide for recovery of ongoing building safety costs through existing service charge provisions while improving the transparency of such charges, preferably by implementing the Committee’s previous recommendations for standardised forms for service charge invoices. The building safety charge should be reserved only for any leases without a service charge and should be treated as a service charge for the purposes of leaseholder protection.